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iiiPrefaceThe primary goal of the ILO is to contribute, with member States, to achieve full andproductive employment and decent work for all, including women and young people, a goalembedded in the ILO Declaration 2008 on Social Justice for a Fair Globalization, and1

which has now been widely adopted by the international community.In order to support member States and the social partners to reach the goal, the ILOpursues a Decent Work Agenda which comprises four interrelated areas: Respect forfundamental workers rights and international labour standards, employment promotion,social protection and social dialogue. Explanations of this integrated approach and relatedchallenges are contained in a number of key documents: in those explaining and elaboratingthe concept of decent work2, in the Employment Policy Convention, 1964 (No. 122), and inthe Global Employment Agenda.The Global Employment Agenda was developed by the ILO through tripartiteconsensus of its Governing Bodys Employment and Social Policy Committee. Since itsadoption in 2003 it has been further articulated and made more operational and today itconstitutes the basic framework through which the ILO pursues the objective of placingemployment at the centre of economic and social policies.3

The Employment Sector is fully engaged in the implementation of the GlobalEmployment Agenda, and is doing so through a large range of technical support andcapacity building activities, advisory services and policy research. As part of its researchand publications programme, the Employment Sector promotes knowledge-generationaround key policy issues and topics conforming to the core elements of the GlobalEmployment Agenda and the Decent Work Agenda. The Sectors publications consist ofbooks, monographs, working papers, employment reports and policy briefs.4

The Employment Working Papers series is designed to disseminate the main findingsof research initiatives undertaken by the various departments and programmes of theSector. The working papers are intended to encourage exchange of ideas and to stimulatedebate. The views expressed are the responsibility of the author(s) and do not necessarilyrepresent those of the ILO.

1See http://www.ilo.org/public/english/bureau/dgo/download/dg_announce_en.pdf2See the successive Reports of the Director-General to the International Labour Conference: Decentwork (1999); Reducing the decent work deficit: A global challenge (2001); Working out of poverty(2003).3See http://www.ilo.org/gea. And in particular: Implementing the Global Employment Agenda:Employment strategies in support of decent work, V ision document, ILO, 2006.4See http://www.ilo.org/employment.

José Manuel Salazar-XirinachsExecutive DirectorEmployment Sector

vForewordAt the 99th session of the International Labour Conference, constituents endorsed theneed to promote a pro-employment macroeconomic fr amework. It was felt that thecurrent framework, while making an important contribution to the goal of macroeconomicstability, paid insufficient attention to the way in which macroeconomic policy instrumentseither helped or hindered employment creation and poverty reduction. In the standardframework that has evolved since the days of the structural adjustment programmes of the1980s and 1990s, and that has remained intact during the 2000s, the emphasis is onattaining key nominal targets pertaining to debts, deficits and inflation. The rationale is thatattaining such targets in the medium to long run will engender a predictablemacroeconomic environment that is crucial for supporting growth and hence employmentcreation. It now appears that macroeconomic stability is necessary, but by no meanssufficient to engender inclusive, job-rich growth.The Employment Policy Department has been endeavouring to identify existingconstraints in the macroeconomic policy instruments that may hinder generation of full andproductive employment, and to suggest a way forward for job-rich growth. A series ofcountry case studies has been conducted, with the support of the ILO/Korea partnershipprogramme. The current case study of Turkey represents one result. The country case studyanalyzes recent macroeconomic performance, shows their relationship with employmentoutcomes or lack thereof, reviews the existing programmes on employment and socialsafety nets, and reflects the views of the ILO constituency and other key nationalstakeholders that were collected through interviews and consultations.Turkey and the IMF signed a Staff Monitoring Program in 1998. Since then, Turkeyexperienced a severe economic crisis in November 2000 and again in February 2001 whenit was following an exchange-rate based disinflation program with the support of the IMF.The burden of adjustment to the crisis fell disproportionately on the labour market, as therate of unemployment rose steadily to 10% and the real wages were reduced abruptly by20% in 2001 and have not recovered to this day. The post-2001 IMF program can becharacterized by new orthodoxy in stabilization p ackages, which aimed at maintaininghigh interest rates to attract speculative foreign capital from the international financialmarkets. This led to shrinkage of the public sector and the consequent deterioration ofeducation and health infrastructure. It also encouraged domestic industry to becomeincreasingly import-dependent, adapting increasingly capital-intensive foreigntechnologies with adverse consequences for domestic employment. This interpretation ofthe Turkish experience in the 2000s is mostly supported by the views expressed by thesocial partners and other stakeholders and analysts, summarized in the appendix of thepaper. In order to rectify the burden of adjustments on the labour market, the paperproposes: (1) fiscal policy to favour expenditure on human capital, (2) monetary policy tointervene effectively in the money and asset markets, including re-introduction of a reserverequirement ratio and other measures to increase the reserve cost of the short term financialinflows; (3) capital market policy that would introduce financial transaction tax/levy on thefinancial flows; and (4) employment policies to implement employment-intensiveinvestment programme in the poor Eastern-Southern provinces and to ensure that anunemployment insurance fund is properly designed and disbursed.Azita Berar AwadDirectorEmployment Policy Department

91. IntroductionFollowing the 1997 Asian crisis, macroeconomic policy designs entered a newjuncture. Often termed  the post-Washington Consensus (Rodrik, 2006), the newunderstanding had been based on factors such as institutional governance, social capital,governance, and importance of credibility in fiscal and monetary policy. In a nutshell, therhetoric of  get the prices right was replaced by the new motto  get the institutions right.This new policy twist led to a broad consensus of great moderation with inflation targetingcentral banking, fiscal discipline, fully flexible and freely floating exchange rates, opencapital accounts, and, along with privatization and increased scope for reduced regulationof the labor market.Yet, this  macro stability is the panacea for all evils view was not short of problems,both theoretically and pragmatically. For one, with the lessons of the 2008/2009 globalcrisis leading to  great recession in mind, it is now clear that price stability, on its own,was not sufficient to maintain macroeconomic stability, as it could not suffice to securefinancial stability and employment growth. In the words of Akyuz (2006, p.46),  thesource of macroeconomic instability has proven to be not instability of the product marketsbut asset markets, and the main challenge for policy makers is not inflation, butunemployment and financial instability. (emphasis added).Further to this observation, it is ironic that employment creation has dropped off thedirect agenda of most central banks, just as the problems of global unemployment,underemployment and poverty are taking centre stage as critical world issues. Thus, thisproject was hailed at a critical juncture during which the supreme orthodoxy of mainstreammacroeconomics was questioned. Alternative directions are now being sought that wouldallow the developing economies more political space. To quote from the terms of researchcommon to all case studies taking a part in this project, The available global evidence  harnessed most nota bly by the Bretton Woodsinstitutions - suggests that concerns about maintaining macroeconomic stability indeveloping countries has not yielded the growth dividends that were expected, norhave they brought about the much needed structural changes that lie at the root ofsustainable and productive employment creation, even in economies regarded assuccessful examples of a macroeconomic reform agenda (ILO, 2010).The post 2001 crisis macroeconomic trajectory of Turkey was shaped directly with thepost-Washington Consensus view in mind. With an exclusive focus of contractionary fiscalpolicy designed to generate non-interest fiscal surplus targets, along with a central bankwhose sole mandate was reduced only to sustaining stability of the price level, Turkey hadbeen one of the show-cases of the great moderation. The Turkish macro economic growthpath was designed and shaped by the IMF, based on the Staff Monitoring Programmeinitially signed 1998. Thus, 1998 is regarded by many analysts as a critical year afterwhich many of the elements of the Turkish macroeconomic policy design had beenstructurally transformed.During the 2000s, despite rapid growth and a significant surge in exports, Turkisheconomy could not generate jobs at the desired rate. Open unemployment rate which stoodat 6.5% in 2000, has jumped to 10.3% in 2002 in the aftermath of the February 2001financial crisis. Since then the Turkish gross domestic product has increased by acumulative 30% in real terms until the contagion of the global crisis in October, 2008. Yet,employment generation capacity of this rapid growth had been dismal, and the openunemployment rate could not be brought down below 9%. Despite rapid expansion ofproduction in many sectors, civilian employment increased sluggishly at best, and labourparticipation remained below its levels in the 1990s.

10The medium term economic program, 2011-2013, chartered by the Turkish StatePlanning Organization (SPO) documents as well that unemployment is expected to remainat the plateau of 13% over the programming horizon. A further caution is that Turkishlabour market is suffering from informalization and marginalization, with low labourparticipation rates, lack of health and social safety nets, and increased fragmentation. Theseassessments are also shared by many other national and international agencies andresearchers of the Turkish economy.According to some interpretations, the meager job creation of the economy is due tothe excessive regulatory framework and the imposed tax burden. Turkey indeed has one ofthe highest tax burdens in its labour markets in comparison to the OECD averages. Tunal(2003), for instance, reports that the social security contributions of the employers reach to22%, and together with other taxes on labour employment, create an additional cost burdenfor employers reaching as much as 35% over net wages. Tunal further argues thatemployment protection laws may have increased the insecurity faced by the workers asemployers try to avoid severance payments by shifting their labour demand to workersmostly from the informal market. This undoubtedly has adverse consequences for taxrevenues and also on the formal industrial relations.Ercan and Tansel (2006), on the other hand, report that it is the new Labour Act(2003) which is the main source of the problem. The Law is criticized (mostly by theemployers wing) with the arguments that job securi ty clauses make the employersreluctant about expanding employment. Ercan and Tansel also summarize the workersunions opposition to this argument stating that it is the first time with the new act that theflexi-time and flexible work de-regulations enter the Turkish labour scene. Yet despitepolicies conducive towards the desired flexibiliti es, not enough jobs have been created. Infact, existing studies claim in this regard that labour market regulations and otherdistortions in the formal economy may actually not be binding for the larger segment ofthe labour market (Agénor et. al. 2006). Onaran (2002) for instance argues that wagesactually exhibit a high degree of flexibility as the power of trade unions has erodedsignificantly in the past two decades.An alternative hypothesis is that the jobless growth problem is regarded as a directsymptom of the current IMF program as implemented in Turkey, together with anexcessively open capital account and widespread financial speculation. According to thisline of thought, due to a virtually unregulated capital account and given the high real ratesof interest prevalent in the Turkish financial markets, Turkey is observed to receive massiveinflows of short-term finance capital. As a result, the domestic currency, TL, appreciatesand Turkey suffers from a widening current account deficit. Appreciated currency bringsforth a surge in imports together with a contraction of labour intensive, traditional exportindustries such as textiles, clothing, and food processing. This leads to contraction offormal jobs and increased informalization of economic activities (see Yeldan (2006),Pamukçu and Yeldan (2005)). This is the hypothesis that will guide the conduct of thisstudy.The purpose of this project report is to address the extent to which the currentmacroeconomic framework contributes to the problem of joblessness in Turkey in thecontext of the Millennium Development Goals as adopted by the UN Millennium Summitin December 2000. In particular, it will focus on issues of the overall macroeconomicenvironment, the impact of fiscal and monetary policies, the exchange rate policy andcapital account management on employment and labour market outcomes. The analysis isto be carried out not only on the basis of assembling empirical evidence but also onassessments of the analytical background that are responsible for the design of the policiesin the 2000s; such as inflation targeting monetary policy; free floating exchange rateregimes with misalignment; erupting external deficits, and fiscal austerity. Extensive usewill be made of the IMF country reports on Turkey, including the most recent article IVconsultations, to analyze the evolution of the contemporary macroeconomic framework.

11The report is organized into under four broad sections. In the first section, the recentdevelopments in the OECD countries and the global economy at large are discussed, interms of patterns of growth, internal and external balances and employment generation.Next, a broad overview of the recent macroeconomic developments in Turkey is provided.Here, the evolution of the key macroeconomic prices such as the exchange rate, the interestrate and price inflation are examined, and it reports on the post-1998 macroeconomic pathof the Turkish economy. The section also compares and contrasts these developmentsagainst key changes in the labour market. Four areas of macroeconomic policies (monetarypolicy, fiscal policy, exchange rate policy and capital account management) are assessed, inthe context of recent internal and external shocks that hit Turkey. It will be argued thatmacroeconomic management in Turkey today places too much emphasis on stability andcredibility dimensions and too little on prudential, protective and allocative dimensionsThe third section reports the effects of the global recession on the Turkish economyand the labour markets, along with the extent and size of the fiscal stimulus measures thathad been taken. The adjustment patterns in the product and the labour markets are thenhighlighted, against the backdrop of the global crisis. Finally, in section four, some policyrecommendations are offered on an alternative, employment-friendly macroeconomicframework. This will mean moving away from a preoccupation with stability andcredibility dimensions of macroeconomic policy that focus almost exclusively on inflation,debt management and fiscal austerity, to an approach that emphasizes prudential, protectiveand distributional dimensions that have a direct bearing on coping with economic volatilityand structural transformation. This places much more emphasis on the role that the CentralBank can play in credit allocation, ensuring stable and competitive real exchange rates,engendering sustainable fiscal resources to support the UN-led  social protection for allinitiative, employment-intensive public investment in infrastructure, active labour marketpolicies, and education and training to enhance skills and employability. I will argue thatthis paradigm shift will require much greater policy space that will only be possible if theTurkish government reduces its reliance on inflows of foreign capital (hot money), adopts amore flexible interpretation of inflation targeting and avoids rigid fiscal rules.An appendix is reserved for a thorough report on consultations with key individualsranging from bureaucrats, trade labour unions and employers associations to academics.These consultations are designed to highlight the diversity of views on macroeconomicpolicy under investigation and are to be guided by the issues specified above under eachpolicy instrument.

122. State of the Global Economy, Current Trendson Growth and EmploymentThe global economy is experiencing its worst crisis since the 1929 Great Depression.Initially dismissed as mostly a routine financial turbulence in 2007, the crisis conditionsaccelerated slowly, yet secularly, to reach an officially declared full-fledged recession inthe UK and US by the last quarter of 2008. Over the course of 2008, the IMF had to reviseits growth projections for the world for the upcoming year three times, down from acelebrated 4.4% initially, to 2.4% in November, and then to a mere 0.5% in late January of2009. Many international financial institutions (IFIs) followed suit. Considering the well-accepted notion that for the world economy, many economists take a rate of growth below2.5% as the threshold for  global recession, the grim reality behind these numbersbecomes clear. The global crisis is expected to take a heavy toll on the labouring massesand those heavily indebted and foreign finance-dependent economies. The InternationalLabour Organization (ILO) warned in early 2009 that the openly unemployed wouldincrease by as much as 50 million individuals by 2010, bringing total unemployed to 230million, or to 7.1% of the global labour force.What is more revealing in our conjuncture is that the current crisis had not beeninitiated in the so-called emerging markets of the global periphery, but erupted directly inthe developed centres of the global economy. What lies at the root of the crisis is not theusual common accusations of corrupt governments o f crony capitalism, with their over-interference with market rationality, but the upfront irrational exuberance of the freemarkets, with their unfettered workings guided by the private profit motive.Thus, by whatever means, the current crisis episode will dwindle into a new kind ofausterity, one lesson remains clear: it is no longer possible for the global economy to returnto the patterns of trade and finance constructed in the post-1980 era. The world economyhas exhausted the dogmas of free trade, liberali zed finance, and flexible labourmarkets where the motive for private profit seeking was taken as the unabated single rulefor efficient allocation of resources leading to global welfare, human rights, civilization,and prosperity. The wide-encompassing restructuring of both the economic realm(consolidating the realm of the markets), and the political aspects of this realm (the States)was a marker of the post-1980 phase of the world economy, which is often characterized asneoliberal globalization.The results, however, were quite unexpected. There had been successful growthepisodes in countries such as China and India where the standard recipe was not followedin verbatim; and there had been cases of costly adjustments as well as financial crisis suchas Mexico 1994; East Asia, 1997; Brazil, 1999; Turkey, 2001; and Argentina, 2001.Overall, the picture had been that some countries managed to achieve rapid, sustainablegrowth with only a modest set of reforms, while some others had been led into deeperchaos and stagnation after implementing an ambitious array of reforms.Indeed, under this standardized policy package of macroeconomic re-structuring,crisis erupted mainly due to premature financial liberalization; lack of governance; and lackof the rule of law. Typically, countries that had been following the policies of  end thefinancial repression ( a la McKinnon, 1973 and Shaw, 1973) liberalized their financialsector too prematurely, and too hastily without any respect to their macroeconomicfundamentals. To see the external adjustment mechanisms more closely, note that in theseeconomies, the aftermath of capital account deregulation often led to increased interestrates.Based on the motive to combat the fear of capital flight, this commitment stimulatedfurther foreign inflows, and the domestic currency appreciated, inviting an even higherlevel of short-term capital and hot money inflows into the often-shallow domestic financial

13markets. Under these conditions the initial bonanza of debt-financed public (e.g. Turkey)or private (e.g. Mexico, Korea) spending escalates rapidly and severs the fragility of theshallow financial markets in the home country. Eventually, the bubble bursts and a seriesof severe and onerous macro adjustments are enacted through very high real interest rates,sizable devaluations, and a harsh entrenchment of aggregate demand accompanied by theshort term hot money outflows. Elements of this vicious cycle are further studied inAdelman and Yeldan (2000), Calvo and Vegh (1999), Dornbusch, Goldfajn and Valdés(1995), Diaz-Alejandro (1985), and more recently referred to as the Diaz-Alejandro-Taylorcycle (following Diaz-Alejandro (1985) and Taylor (1998)). A schema of such events isportrayed in Figure 1.Figure 1. The Diaz Alejandro-Taylor Cycle

At the initiation of the cycle, the economy is under threat of capital flight withpressures to set the domestic interest rates high. Coupled with various market friendlyreforms dictated by IFIs, and a consequent re-stru cturing of the institutional infrastructuremore in line with the interests of finance capital, foreign capital inflows are stimulated, withmostly hot characteristics. The domestic currenc y appreciates and imports expandleading to widening current account deficit. A brief period of rapid growth together withhigh investment and consumption demand ensues. Most probably, inflationary pressuresare also alleviated as costs of imported intermediates become cheaper.This bonanza, however, is not off-limits and the widening current account deficit leadsto external fragilities and a rise in the sovereign risk premium. This needs to be combatedand the international finance capital has to be called back with a new round of even higherinterest rates. The economy is trapped into a vicious cycle with high interest costs,appreciated currency, and ever-expanding current account deficits.In a nutshell, the characteristics of this cycle typically involve the following: (i)International capital market that has been the major source of shocks; (ii) Flows that havelargely originated from and been received by the private sector; (iii) Financial crisis mostlyhitting emerging market economies that were considered to be highly credible andsuccessful; (iv) The rise of capital inflows has been characterized by a lack of regulation,on both the supply and the demand sides.This structure is shared as a common theme in the background to the currency crisis ofthe 1990s. A closer look at the recent financial crisis histories, such as 1994 Mexico andTurkey, 1997 East Asia, 1998 Brazil and Russia, and 2001 Turkey and Argentina, willRisein the domestic interest rate:Stimulate capital inflowsDomestic currency appreciatesImports expand, current accountdeficit widensTo finance the foreign deficit, inviteeven more capital inflows,raise theinterest rate

14reveal that all these episodes had a common operational history in terms of the Diaz-Alejandro  Taylor cycle. Its detrimental effects, however, were not limited only toincreased fragility and crisis-prone dynamics, but were also among the prime causes ofstagnant fixed investments in industry and sluggish employment gains. Turkey is a primeexample of such an indigenous economy that was trapped in the dictates of finance capital,suffering from the aforementioned cycle.

153. Turkeys Macroeconomic Experience with theAge of Policy Reform3.1. Overview: Rapid growth, yet with serious fragilitiesTurkey and the IMF signed a Staff Monitoring Program in 1998 to enable closersupervision and control of the Turkish economy by the IMF staff. Turkey experienced asevere economic crisis in November 2000 and in February 2001 when it was following theexchange rate based disinflation program led and engineered by the IMF.5In 2001, theGNP fell by 7.4% in real terms, consumer price inflation soared to 54.9%, and the currencylost 51% of its value against the major foreign monies. The burden of adjustment felldisproportionately on the labouring classes as the rate of unemployment rose steadily to10%. Real wages were reduced abruptly by 20% upon impact in 2001 and have notrecovered to this day, till the eruption of the great recession, 2007-2010.The IMF had been involved with the macro management of the Turkish economy bothprior to and after the crisis, and provided financial assistance of $20.4 billion, net, between1999 and 2003. Following the crisis, Turkey implemented an orthodox strategy of raisinginterest rates and maintaining an overvalued exch ange rate. The government followed acontractionary fiscal stance, and promised to initiate further steps towards marketfriendly reforms.The post-crisis economic and political adjustments were mainly overseen by the thennewly founded Justice and Development Party (AKP), which came to power enjoyingabsolute majority in the parliament in the November 2002 elections. Though maintainingthe pro-Islamic political agenda, the AKP nevertheless distanced itself from the previousnational view orthodoxy of the traditional Turkis h Islamic movement. The AKPrefurbished itself with a more friendly view towards the West, ready to do business withglobal finance capital and willing to auction-off strategic public assets to trans-nationals.On the political arena, the AKP had given unequivocal support to the US interests in theMiddle East including the then approaching war in Iraq.6

The post-2001 IMF program in Turkey relied mainly on two pillars: (1) Fiscalausterity that targets a 6.5 percent surplus for the public sector in its primary budget7as aratio to the gross domestic product; and (2) A contractionary monetary policy (through anindependent Central Bank) that exclusively aims at price stability (via inflation targeting).Thus, the Turkish government is charged to maintain dual targets: a primary surplus targetin fiscal balances (at 6.5% to the GDP); and an inflation-targeting Central Bank8, whosesole mandate is to maintain price stability and is divorced from all other concerns ofmacroeconomic aggregates.According to the logic of the program, successful achievement of the fiscal andmonetary targets would enhance credibility of the Turkish government, ensuring

5The underlying elements of the disinflation program and the succeeding crisis are discussed indetail in Akyuz and Boratav (2004), Ertugrul and Yeldan (2003), Yeldan, (2002), IndependentSocial Scientists Alliance, 2006.6In fact, many analysts draw parallels with the declaration, in the summer of 2002, of the three-partycoalition government granting no support for the US plans to invade Iraq and the decision to holdearly elections later in the same year.7I.e., balance on non-interest expenditures and aggregate public revenues. The primary surplustarget of the central government budget was set 5% to the GNP.8The target was set at 5% on consumer price inflation for 2006, and 4% for 2007 and 2008.

16reduction in the country risk perception. This would enable reductions in the rate ofinterest that would then stimulate private consumption and fixed investments, paving theway to sustained growth. Thus, it is alleged that what is being implemented is actually anexpansionary program of fiscal contraction. Table 1 summarizes the macroeconomicdevelopments under close IMF supervision.Table 1. Basic Characteristics of the Turkish Economy under the IMF Surveillance 1998- 2006

Source: SPO Maine Economic Indicator: Under Secretariat of Treasury, Main Economic Indicators TR Central BankThe post-crisis adjustments of the Turkish economy came at a very unique conjunctureof the global economy. First of all, growth, while rapid, showed quite peculiarcharacteristics. It was mainly driven by a massive inflow of foreign finance capital, whichin turn was lured by significantly high rates of interest offered domestically; hence, it wasspeculative-led in nature (a la Grabel, 1995). The main mechanism has been that the highrates of interest prevailing in the Turkish asset markets attracted short-term finance capital,and in return, the relative abundance of foreign exchange led to overvaluation of the Lira.Cheapened foreign exchange costs led to an import boom both in consumption andinvestment goods. The overvaluation of the Lira, together with the greedy expectations ofthe arbitrageurs in an era of rampant financial glut in the global finance markets, led to asevere rise in its foreign deficit, and in external indebtedness. Hence, the post-1990 Turkeyoperating under a liberalized, open capital account reveals much of the adjustmentmechanisms of the Diaz-Alejandro-Taylor cycle in its external economy.A further characteristic of the post-2001 era was Turkeys poor job creation pattern.Rapid rates of growth were accompanied by high rates of unemployment and lowparticipation rates. The rate of total unemployment rose to above 10% after the 2001 crisis,and despite rapid growth, has not come down to its pre-crisis levels. With the availablebonanza of relatively cheap imports, Turkey had been consuming the products of foreignBasic Characteristics of the Turkish Economy Under the IMF Surveillance, 1998-2006StaffMonitoringProgramInitiated

17economies, causing a lower value added production at home. Thus, the problem of poorjob performance and the fragility embedded in the increase of the current account deficitwere, in fact, manifestations of the same conundrum.Another key characteristic of the period was the inertia of interest rates. Inertia of thereal rate of interest is enigmatic from the successful macro economic performance achievedthus far on the fiscal front. Even though one traces a decline in the general plateau of thereal interest rates, the Turkish interest charges are observed to remain significantly higherthan those that prevail in most emerging market economies. The credit interest rate, inparticular, has been stagnant at the rate 16%, despite the deceleration of price inflation untilthe 2008 global recession. (See Figure 2).Figure 2. Inflation (CPI) and Real Interest Rates

Source: TURKSTAT, www.tuik.gov.tr .

High rates of interest were conducive in generating a high inflow of hot moneyfinance to the Turkish financial markets. The most direct effect of the surge in foreignfinance capital over this period was felt in the foreign exchange market. The over-abundance of foreign exchange supplied by the foreign financial arbitrageurs seekingpositive yields led significant pressures for the Turkish Lira to appreciate. As the TurkishCentral Bank has restricted its monetary policies only to the control of price inflation, andleft the value of the domestic currency to the speculative decisions of the market forces, theLira appreciated by as much as 60% in real terms against the US Dollar and by 25% againstthe Euro (in producer price parity conditions).I will now turn our attention to the long history of the exchange rate movements inTurkey. Figure 3 portrays the path of the bilateral (vis-à-vis the US$) real exchange rate (inPPP terms, with producer prices as the deflator) over a very broad time period. The fixedexchange rate regime was abandoned in January 1980 and the Turkish Lira (TL) was left toa downward slide mainly for the objective of promoting exports. A substantial support for-20.00-10.000.0010.0020.0030.0040.0050.0060.0070.0080.00Inflaton rate CPI (2003=100)CB Overnight interest rates (Nominal)GDI Interest rates (3-monthly componded, Real)Credit interst rates (Real)

18export manufacturing was further granted, which involved tax rebates, duty free importallowances and subsidized credit. As observed from the Figure, TL was mainly on a realdepreciating trend over the 1980s.9

Turkey has completed its financial liberalization with full deregulation of the capitalaccount in August 1989. Consequently, with the advent of elimination of controls onforeign capital transactions and the declaration of convertibility of the Lira in 1989, Turkeyopened up its domestic asset markets to global financial competition. In this setting, theCentral Bank had to abandon its traditional instruments of monetary control and hadbecome directly liable to conditions of financial arbitrage in global markets.The immediate three-year period after the 1989 reforms was marked with a virtualelimination of the foreign exchange gap which had crippled the Turkish macro balancesfor almost four decades. With the eruption of hot money inflows enabling abundantforeign exchange, Turkish commodity markets were all of a sudden flooded with cheapimports. Erratic movements in the current account, a rising trade deficit (from 3.5% ofGNP in 1985-88 to 6% in 1990-93 and then again by 8% in 2000-2001) and a drasticdeterioration of fiscal balances showed the unsustainability of the post-1989 model, withthe eruption of the severe financial crisis of April 1994 and November 2000 to February,2001.Figure 3. Real Exchange Rate Index (TL/$)Source: TR Central Bank and TURKSTAT.The Central Bank of Turkey (CBRT) was granted its independence from politicalauthority in October 2001. What follows, the Central Bank announced that its sole mandateis to restore and maintain price stability in the domestic markets and that it will follow animplicit inflation targeting until conditions are ready for full targeting. From 2002 and

9Note that in the figure an upward movement of the exchange rate index signals depreciation of theTurkish Lira, and the reverse movement is an indication of its appreciation.0.025.050.075.0100.0125.0150.0Real Exchange Rate Index (TL/$)(Deflated by Producer Prices)capital accountliberalizationAugust 1989financial crisisApril 1994financial crisesNovember 2000 andFebruary 2001age of great moderation2003 -2008great recessiondeepens October2008export promotion

192003 the CBRT targeted its net domestic asset posi tion as a prelude to full inflationtargeting. Finally in January 1, 2006, the CBRT announced that it would adopt full-fledgedinflation targeting.The 2000s were the era of great moderation, together with flexible (floating)exchange rate regimes, independent inflation targeting Central Banks with the objective ofprice stability, and freely mobile capital flows. Turkey witnessed severe appreciation of itscurrency, the Lira, from 2003 to 2008. The Lira had appreciated by as much as 60% in realterms against the US dollar. The onset of the great recession in October 2008 caused theslight depreciation of the TL; yet while short of maintaining its real level of January 1982.The structural overvaluation of the TL, not surprisingly, manifests itself in ever-expanding deficits on the commodity trade and current account balances. As traditionalTurkish exports lose their competitiveness, new export lines emerge. Yet, these proved tobe mostly import-dependent, assembly-line industries, such as automotive parts andconsumer durables. They use cheap import materials that are assembled in Turkey with lowvalue added, and are re-directed for export. Thus, being mostly import-dependent, theyhave a low capacity to generate value added and employment. As traditional exportsdwindled, the newly emerging export industries had not been vigorous enough to close thetrade gap.Consequently, from 2003, Turkey began to witness expanding current accountdeficits, with the figure in 2007 reaching a record-breaking magnitude of $38.1 billion, or6.7% as a ratio to the aggregate GNP. In appreciation of this figure, it has to be noted thatTurkey traditionally has never been a current account deficit-prone economy. Over the lasttwo decades, (80s and 90s) the average of the cur rent account balance hovered aroundplus and minus 1.5-2.0%, with deficits exceeding 3%, leading to open crisis as in 1994 and2001, during which significant currency depreciations had taken place. Thus, the mechanicsbehind the culminating current account deficit of the post-2001 period can only beunderstood in the context of the speculative transactions embedded in the finance accountof the balance of payments. Table 2 summarizes the relevant data.The data in Table 2 indicate that the finance account has depicted a net surplus of 16.4billion from the period of 2003 to 2007. About a third of this sum ($51.2 billion) was dueto credit financing of the banking sector and the non-bank enterprises, while a sum of $42.1billion originated from non-residents portfolio investments in Turkey. Residents haveexported financial capital at the magnitude of $10.1 billion, and if one interprets the neterrors and omissions term of the BOP accounts as an indicator of domestic hot money flows(see e.g. and Akyuz, 2004; Boratav and Yeldan, 2005), the total sum of net speculativefinance capital inflows is calculated to reach $41.2 billion over the post-2003 adjustmentsunder the AKP administration.

20Table 2. Selected Indicators on Balance of Payments and Foreign Debt (Millions US$)Source: TR Central Bank (www.tcmb.gov.tr)The foreign direct investment (FDI) is taken as an important source of financing thecurrent account deficit especially after 2005. The BOP data reveal a sudden increase in theflow of FDI monies totalling $40.7 billion in 2006 and 2007. However, looking at thecomponents of FDI more closely, it would be revealed that the bulk of the aforementionedflow had been due to privatization receipts plus real estate and land purchases byforeigners. Neither of these items are sustainable sources of foreign exchange, they weredriven by speculative arbitrage opportunities rather than enhancing the real physical capitalstock of the domestic economy.During its administration from 2003 to 2007, the first AKP government succeeded inattracting a total of $94 billion of hot money. T his stock was fed upon two sources: (i)foreigners holdings of government debt instruments and (ii) foreigners holdings ofsecurities at the Istanbul Stock Exchange Market. This aggregate stock of hot moneyreaches to almost the total cumulative current account deficit over the post-2001 crisisperiod.In figure 4, I disclose the stock of hot money fr om 2005 to current date. The stockof hot money reached its peak in December 2007, with a total sum of 94 billion dollars asindicated. With the widening of the global crisis in 2008, the hot money flows werereversed and in February 2009, it reached its lowest value of 65 billion dollars. Therebound of the hot money flows was equally abrupt in 2010. The rapid expansion of globalliquidity following the fiscal stimulus measures is now being channelled into the emergingmarket economies with Turkey capturing a lions share. The widening of the currentaccount deficit under this new speculative attack is unavoidable under conditions of severeappreciation of the Lira.

21Figure 4. Stock of Securities and GDIs Held by Non-residents (Million US$)

Source: TR Central Bank (www.tcmb.gov.tr)

A significant detrimental nature of the hot money-led balance of payments financingwas foreign debt intensity. The stock of external debt has increased by a total of $150.2billion from the end of 2002 to the end of the third quarter of 2008 (just before the globalcrisis had hit Turkey). This indicates a cumulative increase at a rate of 82.3% in US dollarterms over a period of 5.5 years. This persistent external fragility is actually one of themain reasons why Turkey had been hit the hardest among the emerging market economiesin the post 2008 global crisis.Another facet of the external fragility of the Turkish balance of payments regards thecomposition of debt. As far as the post-2001 era is concerned, a very critical feature of theexternal debt driven current account financing was that it was mostly driven by the non-financial private sector, rather than the public sector. Within the private sector, non-financial enterprises explain 60% of the aggregate increase of private external debt over thepost-2001 period and accounts for 70.9% of the total stock of private debt by 2008. Idocument the relevant data in Figure 5.

Source: TR Central Bank, www.tcmb.gov.tr .The sources of the current account deficit varied, with the deficit on merchandise tradegenerating the largest contribution. As for the internal component of the current accountdeficit, we witness that the main source had been the widening of the private saving-investment gap in contrast to the relative equilibrium of the public saving-investmentbalance. As the public sector balances were maintained, private sectors savings deficitdeepened. In short, Turkish adjustments after 2001 into the 2008 global recession entailedsubstitution of the private against the public deficit. Figure 6 below narrates thisobservation, while Figure 7 traces this adjustment to the overall deceleration of the savingseffort as a ratio to the GNP.Figure 6. Components of the Current Account Deficit

The behaviour of savings seems to be directly influenced by foreign exchangemovements. The Lira appreciated in real terms almost by 60% since 2002 (see Figure 3above). This appreciation led a consumption boom based on cheaper imports and wideningforeign deficits. Thus, Turkey was following the downward path of savings as was thecase of the main OECD economies on the road towards the global recession, with a highprivate consumption boom, speculative financing of the external deficits, and heavyexternal debt burden.Here an important issue is the decline in domestic savings effort against high domesticreal interest rates. One would expect rising savings if interest rates were high. Part of theexplanation lies with the observation that even though the Turkish rates of interest werehigh from the point of view of the foreign financial investors, they were on a decliningtrend for domestic households. The decline of the real rate of interest of the public bonds,for instance, from 30% on average to less than 15%, was a strong reduction. Coupled withan obsessive hunger for credit fuelled via depreciated cost of foreign currencies, Turkey fellinto a trap of high consumption with high import content.From the viewpoint of the foreign financial arbitrageurs, what is more important is notthe real value of the interest rate, but its nominal value deflated by the currencydepreciation. This is an important point and we will dwell on it. As a new emergingmarket, Turkey was able to attract such capital in flows with the aid of very high rates offinancial arbitrage than it offered in the international capital markets. This financialarbitrage can be calculated as the end result of an operation that initially converts theforeign exchange into Turkish Liras at the initial rate of exchange, and after earning the(nominal) rate of interest R offered in the domestic asset markets, is re-converted back tothe foreign currency at the then prevailing foreign exchange rate. Algebraically, this netarbitrage gain is calculated as:

Thus, during the course of this operation, financial speculators would gain domesticrate of R, and lose at the rate of depreciation of the Lira, e. The net difference between thetwo prices would give us the net financial arbitrage gain. I calculate the evolution of suchgains over the 2000s in Figure 8. Here, the main hypothesis is that the financialarbitrageurs would financially invest their foreign monies at the domestic instrument that5.010.015.020.025.030.035.040.02002 2003 2004 2005 2006 2007Private Savings / GNPPrivate savings / Private disposable income111++R

Source: Author’s calculations based on Central Bank data.According to the calculations portrayed in Figure 8, Turkey has offered arbitrage ratesof 80% during the February crisis of 2001; 60% in December 2002; 75% in the summer of2003; and became one of the leading emerging markets in the world of financialspeculation! While the US and the OECD interest rates were at 2.5  4 % levels, Turkeycontinued to offer arbitrage gains over dollar-denominated assets reaching 30%. Suchreturns enabled Turkey to attract huge sums of speculative finance capital with a significanthot component especially during 2005 and 2007.It would definitely be unrealistic to expect fixed investments to be allocated to theindustrial activities within an economy offering such rates of return to the speculativefinancial transactions. As a matter of fact, in the aftermath of the 2001 crisis, fixedinvestments destined for the manufacturing industries did not exceed their real 1998 levelsuntil late 2005. In sum, contrary to the traditional stabilization packages that aimed atincreasing interest rates to constrain the domestic demand, the new orthodoxy aimed atmaintaining high interest rates for the purpose of attracting speculative foreign capital fromthe international financial markets. The end result in the Turkish context was the shrinkageof the public sector in a speculative-led growth environment, and the consequentdeterioration of education and health infrastructure, which necessitated increasing publicfunds urgently. Furthermore, as the domestic industry intensified its import dependence, itwas forced toward adaptation of increasingly capital-intensive, foreign technologies withadverse consequences on domestic employment. It is to this issue we now turn.

254. Patterns of Employment4.1. Labour market indicatorsDuring the 2000s, despite rapid growth and a significant surge in exports, the Turkisheconomy could not generate jobs at the desired rate. The open unemployment rate, whichstood at 6.5% in 2000 jumped to 10.3% in 2002 in the aftermath of the February 2001financial crisis. Since then the Turkish gross domestic product increased by a cumulative30% in real terms. However, the employment generation capacity of this rapid growth hadbeen dismal, and the open unemployment rate could not be brought down below 9% by theend of 2007, just before the eruption of the current global economic crisis. Despite rapidexpansion of production in many sectors, civilian employment increased sluggishly at best,and labour participation remained below its levels as observed during the 1990s. Currently,(as of June 2010) the open unemployment rate stands at 10.5%, one of the highest amongthe OECD countries. Table 3 tabulates pertinent data on the Turkish labour market.Table 3. Developments in the Turkish Labour Market (1000 persons)

Source: TURKSTAT Household Labour Surveyswww.tuik.gov.tr

The civilian labour force (ages 15+) reached 52.5 million people as of June 2010.Total employment reached 23.488 million. The number of openly unemployed people wasreportedly 2.751 million, bringing the open unemployment ratio to 10.5%. The rate of openunemployment was 6.5% in 2000, increased to 10.3% in 2002, and remained at that plateaudespite the rapid surges in GDP and exports. In fact, from the post-2001 adjustment path tothe global recession of 2008/2010, we witness a jump of the trend of open unemployment atalmost regular intervals. Based on a quarterly version of the data tabulated in Table 3, onecan highlight the evolution of the unemployment rate in Figure 9.

An important group of people not covered in those numbers is the group of discouraged workers. As distinguished in the TURKSTAT survey s, this group isidentified as:  Persons not looking for a job yet ready to work if offered a job: (i) Seekingemployment and ready to work within 15 days, and yet did not use any of the job searchchannels in the last 3 months; plus (ii) discouraged workers. This group of people is notcounted as part of the civilian labour force and is regarded out of the openly unemployed.This number had been consistently rising over the course of 2000s and according to theTurkstats Household Survey results in June 2010, had reached to 1.857 million. If we addthe TURKSTAT data on the disguised unemployment defined as such, the excess laboursupply (unemployed + disguised) is observed to reach 16.4% of the labour force.Open unemployment is acute among the youth. As of June 2010, youthunemployment (ages 15-24) stood at 19.1%. In the urban centres, this number reaches23.1%. The labour participation ratio is also significantly low with a current average of49%. This ratio is especially low among urban women with 24.9%. The most strikingobservation on the Turkish labour markets over the post-2001 crisis era has been thesluggishly slow performance of the employment generation capacity of the economy.Despite the very rapid growth performance across industry and services, employmentgrowth was meagre. To make this assessment clearer, we plot the quarterly growth rates inreal gross domestic product in Figure 10, and contrast the y-o-y annualized rates of changein labour employment. In order to make meaningful comparisons, the changes in labouremployment are calculated relative to the same quarter of the previous year.

The figure discloses that over 27 quarters of data points between 2002.Q1 and2008.QIII, the average rate of growth in real GDP had been 6.5%. In contrast, the rate ofchange of employment averaged only 0.8% over the same period. Over the 27 quartersportrayed in the figure, GDP growth was positive in all periods. Yet, labour employmentgrowth was negative in 14 of those 27 quarters. Another reflection of this phenomenon wasthe significantly low elasticity of employment; i.e., the percentage gain in employment dueto percentage changes in GDP growth had been relatively low (see table 4). Comparedover broad period averages, the employment generation capacity of the domestic economyseems to have been relatively poor in the post-2000s. There had been labour shedding inagriculture, while the non-agricultural sectors had significantly lower employmentelasticities. All of these phenomena had been succinctly phrased as jobless growth forTurkey. (See, e.g. Telli, Voyvoda, Yeldan, 2006; Taymaz, 2007).Table 4. Output Elasticities of Employment by Sectors (Annual averages)

The sectoral breakdown of the post-crisis employment patterns reveals, in fact, amassive depopulation in the rural economy. Agricultural employment reduced by 3,073thousand workers from 2001 to 2008. Against this fall, there had been a total increase ofemployment in the services sectors by 1.944 thousand, and by only 667 thousand inindustry. Simultaneous to this was the overall expansion of the aggregate labour supplyfrom 47.158 million in 2001 to 50.772 million in 2008, adding to the acuteness of thejoblessness problem. Thus, it is clear that the structure of the work force has been changingwith population moving out of rural areas into urban areas, and yet this shift out ofagriculture has not been converted into an expansion of the industrial labour force, and gottranslated mostly as  marginalized/informal labour into services. Regarding theproductivity patterns and employment incidences across the non-agricultural sectors, recent-15.00-10.00-5.000.005.0010.0015.002001.I2001.II2001.III2001.IV2002.I2002.II2002.III2002.IV2003.I2003.II2003.III2003.IV2004.I2004.II2004.III2004.IV2005.I2005.II2005.III2005.IV2006.I2006.II2006.III2006.IV2007.I2007.II2007.III2007.IV2008.I2008.II2008.IIIRate of Change in EmploymentRate of Change in GDPOutput Elasticities of Employment By Sectors (Annual averages)1989-2008 1989-2000 2002-2008Total 0.25 0.39 0.14Agriculture -1.19 -0.42 -1.66Non-Agricultural Sectors 0.54 0.68 0.48Industry 0.43 0.49 0.39Services 0.55 0.76 0.47Source: Author's calculations based on Turkstat and SPO data

28data are scarce and studies are limited. Focusing on the manufacturing industries, we reportavailable figures from Taymaz and Voyvoda (2009), who studied growth in manufacturingoutput and in employment as distinguished by sectors.Figure 11 summarizes Taymaz and Voyvodas findings in a nutshell. From 2002 to2007, the manufacturing industry as a whole grew at an annual rate of 8.9%. In contrast,the rate of manufacturing employment was a meagre 1.3%. Across sectors, all of the 21subsectors except one achieved positive growth rates over this period. Yet theiremployment performance had been quite mixed and nine out of those 21 actually reportedlabour shedding. The decline in employment was especially pronounced in traditionalsectors such as food processing, textiles and mining and quarrying.Figure 11. Production and Employment Gains in Manufacturing (2002-2007)

Source: Taymaz and Voyvoda (2009).To complete this picture, there is ample evidence that agricultural labour surplus hasbeen moving into small scale, family-owned services with low-quality, low-pay, andinsecure jobs, intensifying the informalization o f the urban labour markets (see also,Ercan and Tansel, 2006; Taymaz and Ozler, 2005; Agénor et.al, 2007). Our interviewswith social partners indicated that there was a general agreement towards the disruptiveeffects of the widening foreign deficit and the volatility of the capital flows in general. Forinstance, the view of the Central Bank stressed that,Current account deficit is one of the delicate iss ues concerning the Turkisheconomy. Looking at the past, it can be observed that due to structural characteristicsof the Turkish economy, current account deficit rises faster with increasing rates ofgrowth. On the flipside, the periods during which the current account deficit declinesor turns into a surplus coincide with the periods of lower growth rates or crisis. Sucha structure reveals that the current account deficit has a structural character as wellas a cyclical one. There is a need for a transformation of this fragility and riskcreating structure of the current account. The current account should be kept undercontrol through supply side macro and microeconomic policies with medium to long-run perspective.Similarly, an anonymous economist indicated that,

29With the inflation targeting policy, which has bee n de facto in implementationsince 2006, there raised a system of a downward pressure on wages. Therefore, it isnot possible to say that the monetary policy aims at reducing poverty andunemployment. How should the monetary policy be formulated? A dynamic welfarefunction should underlay the monetary policy and the price levels for different incomegroups should be defined and monitored.In fact, data reveals that the post-2001 period had also witnessed a pattern ofcontraction first, and then stabilization of the manufacturing wages. Such a transfer of thefinancial returns through very high real interest rates offered to the financial system would,no doubt, call for repercussions on the primary categories of income distribution. It is clearthat creation of such a financial surplus would directly necessitate a squeeze of the wagefund and a transfer of the surplus away from wage-labour towards capital incomes ingeneral. It is possible to find evidence to the extent of this surplus transfer from the path ofthe manufacturing wages. Figure 12 portrays the dynamics of the manufacturing (nominal)wages and offer contrasts against inflation in consumer prices.Figure 12. Wages and Price Movements in Manufacturing (1997=100)

Source: Turkstat, www.tuik.gov.tr

However, there is another important observation one can deduce from the Figure 12.This is the realized stability of the real wage path somewhat after 2005. The real wage ratein manufacturing was typically following the business cycle with a lag all over the post1990 reform age, and yet its fluctuations seem all of a sudden to be curtailed. See inparticular the post-1990 historical path of the wage rate as depicted in Figure 13 below.What could be the explanation of this relative stability after 2005?

Source: State Planning Organization, www.dpt.gov.trI argue that this observation pertains mostly due to the switch first to implicit (2002-2005), and then to explicit inflation targeting regimes starting 2006. With the advent ofexplicit inflation targets, almost all contracts started being offered against the inflationtarget set by the Central Bank. Thus, the objective of price stability in practice meant wagestability. Under absence of a nominal anchor elsewhere, the inflation targeting regimeenabled the real cost of labour to serve such an anchor. Searching for price stability underconditions of great moderation had also meant in the Turkish labour markets, de factowage stability and diversion of the real wage numerations away from gains in theproductivity of labour.In sum, the great recession hit the Turkish labour markets under such conditions offaltering wage remunerations, persistent unemployment, and over-dependence on externalfinancing. There was widespread anecdotal evidence on the issue of low wage growth andopening up of the gap between wage remunerations and productivity gains. Murat Özverifrom the Labour and Society Journal, for instance, indicates that The productivity gainsare attained not though new investments but through increasing the degree of exploitationof the employees. There has not been a new industrial investment taken place andemployment numbers are severely decreasing. Dr Öz veri also complemented that Theproductivity gains are attained not though new investments but through increasing thedegree of exploitation of the employees. There has not been a new industrial investmenttaken place and employment numbers are severely decreasing.4.2. The great recession and the Turkish labour mar ketsThe effects of the global crisis on the Turkish economy were increasingly felt startingin the third quarter of 2008. As the growth rate in GDP decelerated to 0.9% as an averagefor the whole of 2008, it registered a further decline of 6.8% over the first half of 2009.The burden of adjustment increasingly fell on the real economy, in particular the industrialsectors and the labour market. Industrial output fell by 24% by January 2009 and couldhave reached the pre-crisis levels only as late as July 2010. The open unemployment raterose secularly towards the second half of 2008 and jumped to a new plateau in 2009 and406080100120140160Real Wage Index in Manufacturing(1997=100)Inflationtargeting regime

31finally receded to its pre-crisis levels, albeit at significant wage losses and extendedinformalization of the work place. (See Figure 14).Figure 14. Turkey: Open Employment Ratio under the Global Crisis

Source: TURKSTAT, Household Labour Surveys.A significant characteristic of the unemployment problem over this period was therapid rise of long-term unemployed that is those who had been unemployed for 6 monthsand more. In 2008, the annual average of long-term unemployed for the duration of sixmonths and more was 1,112 thousand persons, or 42% of the total openly unemployed. In2009, the share of long term unemployed to the total increased to 45%, or 1,560 persons.As of June 2010, the share of long term unemployed stood at 49%. Figure 15 below givesthe evolution of long term unemployed across months.Figure 15. Turkey: Long-term Unemployment (1000 persons)

32When contrasted against selected major OECD economies, Turkey fares midway interms of its long-term unemployment status. As data from the joint IMF-ILO studyindicate, long-term unemployment seems especially acute in Germany and Italy with ratesclose to 60% (See Figure 16). The IMF-ILO document argues that, al though there areobvious cyclical patterns, it is clear that there has been a secular upward trend in theduration of unemployment. This indicates that the re are structural factors hindering the re-employment prospects in these countries that were present before the global crisis.Figure 16. Long-term Unemployment as a Share of Total Unemployment %

Source: IMF and ILO (2010); Turkey: TURKSTAT Household Labour SurveysAnother important structural breakdown is the composition of the unemployed withrespect to education status. The global crisis hit all education levels almost proportionately,with a slightly more pronounced effect over the university graduates in relative terms. As of2009 average, 59 percent of total unemployment has less than high schooling (1,670thousand persons), 26 percent was high school graduates (744 thousand persons), and 13percent held university degrees (360 thousand persons).

01020304050607080GermanyItalyFranceSpainIrelandJapanUKUSASweedenCanadaMexicoTURKEYLong Term Unemployed As A Share of Total Unemployment, %20072009

33Figure 17. Unemployment by Types of Education (1000 persons)

Source: TURKSTAT, Household Labour Surveys.

4.3. The macroeconomics of the stimulus package andits employment impactThe government had enacted a series of stimulus packages to combat aggravatingunemployment and output losses. The Turkish response to the global crisis has mainlyrelied on tax reductions and subsidies to promote investment and employment. It isestimated that as a ratio to the GDP, the fiscal costs of the overall stimulus package were onthe order of 0.91% in 2008, 3.15% in 2009, and 1.56% in 2010.Pertaining to the labour markets, the first package was announced in October 2008.